Dear Partners,
For the month of October, Caravel returned +3.40% compared to +6.12% for the benchmark1 (+5.87% for the S&P 500 & +6.38% for the SPTSX). 1 This brings year to date total net return to +15.32% for the fund and +27.03% for the benchmark, respectively.

November was a risk-on month for most asset classes with any lingering fog surrounding the US federal election being resoundingly cleared. The merits of Trump’s espoused policies seem to be overshadowing the risks for now when it comes to US growth and the economy. We are however monitoring the slowing pace of disinflation and the sharp rise in long-term treasury rates that have caused jitters in the market since the Federal Reserve meeting on December 18th.

For our part, the fund posted a solid month of gains primarily driven by the equity long-short book. All strategies contributed positively except for our hedge book, which cost the fund approximately 0.8% in November. We carried an elevated level of hedges into the month due to the stark differences in policies between the two US presidential candidates. Having said that, we were able to make some profitable trades as the implied odds of a Trump victory narrowed from about a 2:1 favourite to a coin flip by the weekend before the election. Our analysis concluded that the odds makers had overcorrected, and we estimated the GOP’s chances at closer to a 3:2 favourite. These trades, primarily focused on crypto and other Trump proxies, earned us about 1.0% gross on risked exposure of less than 3.0%. We have partially monetized these positions after violent moves higher but retain some exposure to assets we expect to thematically benefit from future political developments in the US. MDA and PNG were strong performers again, up 26% and 17% respectively in November. We are as tired of writing about these two names as you are of hearing about them so we will shift our focus this month for the sake of variety.

One name we haven’t written about for a while is ONEX, which we first mentioned in Q1 2023 and have held in some form ever since. Though some of the shine came off the stock, which retreated from a peak of ~$107 in January 2024 to a low of ~$88 in August, our thesis remained the same. ONEX printed a very strong Q3 in early November and finished the month +14%. The reason we wanted to mention ONEX is to describe how we think about trading core names to retain exposure while mitigating risk.

Most of you are aware of a tool investors sometimes use called a stop-loss. A stop-loss is a price level you choose that, if a stock you own drops a certain amount, triggers a sell order. For example, if you own a stock at $10, you might put a $9 stop loss, which theoretically limits your downside to 10% on that position.

The problem with stop-losses is they don’t help very much when major news hits a stock that sends it right past your level. For example, if overnight a war breaks out or that stock you own is implicated in some sort of fraud, your shares may open at $5 the next morning. Your $9 stop loss protected you about as much as a tinfoil helmet in this scenario.

However, there is a way to replicate a stop loss without this pitfall in certain instances – through listed call options. This is a strategy we have been employing for many months with ONEX, after the shares went up >50% as the first leg of our initial thesis played out.

As a characteristic example, let’s say ONEX is trading at $105. You, being a God-fearing portfolio manager, are rightly nervous. After all the stock was in the $60’s not long ago when you were buying up shares hand over fist. The daily price chart looks like something you need to be at least five feet tall to climb aboard. So, what do you do to avoid the (potential) steep drop ahead? Well, some would probably put a stop-loss on it and call it a day. We covered why that doesn’t work for us. So instead of putting a $100 stop loss on it, we bought $100 calls for $7. Essentially, for $7 we rented all of the upside above $100 and assumed none of the downside below it. Three quick scenarios on what could have happened from there:

• Scenario A: ONEX goes to $150. Caravel makes $43 per share ($150 minus $100 minus $7) while shareholders make $45 from the aforementioned $105 level. This represents upside capture of 96%.
• Scenario B: ONEX goes to $88. Caravel loses $7 per share while shareholders lose $17. This represents downside capture of 41%, and is essentially what happened in practice this year.
• Scenario C: ONEX goes back to $60. Caravel loses $7 per share while shareholders lose $45. This represents downside capture of 16%.

I use this long-winded example to make a (hopefully) simple point. We believe our flexible mandate and
deep understanding of derivatives and other risk-management tools constitute one of the most compelling features of our fund – namely the ability to capture a high degree of upside offered by our positions and the simultaneous ability to materially reduce their inherent downside risk. ONEX was a real-life example of this, as we held 100% of our exposure through calls at the time of their strong Q3. We made more than twice what we could have lost if the earnings had not been so hot.

I’ll leave you with an idea we are very excited about going into 2025. We have highlighted some names
this year before they went on strong runs (ARTG, MDA, PNG) and hope to do so again here. CanAlaska (TSXV: CVV) is a uranium explorer with assets in the prolific Athabasca Basin of Saskatchewan. To keep this one very simple: We believe the company is well on their way to defining a 100+ million pound resource of high-grade Uranium. Based on comparable companies, a valuation of C$5 per pound of resource is completely plausible. If we use a share count of 200 million to account for future dilution that will be required to develop the project, I get an implied share price of C$2.50. CVV is currently trading around $0.70 and has recently completed a financing that positions the company well over the next twelve months. This stock could easily be 2-3x higher by this time next year. The fund has established a meaningful position in CVV over the past few months and has pared back its other Uranium exposure materially to reduce industry-level risk. We remain highly constructive on the Uranium thematic and CVV, which should be catalyst-rich as we head into 2025, making it our favourite stock in the space.

We’d like to wish all of our partners and their families a joyful and healthy holiday season as well as a prosperous new year. 2024 has been a transformational year at Caravel and we couldn’t be more excited to hit the ground running in 2025. We thank you for your steadfast confidence and support.

Sincerely,
Jack and Glen
Managing Partners, Caravel Capital

¹ Benchmark = 50/50 weighting of S&P 500 & SPTSX Composite Indices